Answer to Question #275980 in Microeconomics for Mohad Houshya

Question

1) Assume that for olive oil in Palestine, the price elasticity of demand is 0.8 and the price

elasticity of supply is 0.7. And suppose that the demand for the Palestinian olive oil has

increased by 20%. Do you think the price of Palestinian olive oil would increase or decrease?

By how much? Explain and show calculations.

Answer 1

Price elasticity of demand (PED) = 0.8

% change in quantity demanded = 20%

$PED=\frac{\bigtriangleup Q}{\bigtriangleup P}$

$0.8=\frac{0.20}{\bigtriangleup P}$

$\bigtriangleup P=\frac{0.20}{0.8}=0.25$

This means the price of Palestinian olive oil would decrease by 25% that resulted as increase in quantity demanded by 20%.

Based on this, it can say that the price elasticity of demand is inelastic for Palestinian olive oil.